Nationwide ERISA Suit Survives Challenge

March 15, 2006 (PLANSPONSOR.com) - A federal judge
in Connecticut has rebuffed efforts by two financial services
companies seeking dismissal of a lawsuit filed by trustees of
five 401(k) plans claiming the financial services firms
breached their fiduciary duties.

US District Judge Stefan Underhill of the US District
Court for the District of Connecticut said a reasonable
jury could find that Nationwide Financial Services Inc. and
Nationwide Life Insurance Co. were plan fiduciaries under
the Employee Retirement Income Security Act (ERISA).

The trustees deserved a chance to present further
evidence against the Nationwide companies, Underhill
asserted.

“A rational factfinder, viewing the evidence in the
light most favorable to the Trustees, could find that
Nationwide’s ability to select, remove, and replace the
mutual funds available for the Plans’ investment
constituted discretionary authority or discretionary
control respecting disposition of plan assets, and thus
that Nationwide is an ERISA fiduciary,” Underhill
wrote in his opinion. “The Trustees have also raised
triable issues concerning whether the challenged payments
constitute plan assets under a functional approach and
whether, even if the revenue-sharing payments do not
constitute plan assets, Nationwide’s service contracts
constitute prohibited transactions.”

According to the court, the Nationwide companies offered
the plans various investment options, including insurance
products such as variable annuities. The variable annuity
contracts allowed the plans and plan participants to invest
in a variety of mutual funds selected by Nationwide.

The trustees’ allegations against Nationwide partly
center on a system dating back to the early to mid-1990s
when Nationwide implemented a system under which mutual
funds would make payments to the Nationwide companies based
on a percentage of the assets that the plans and
participants invested in the mutual funds.

In 2001, the trustees sued the Nationwide companies
alleging that the companies’ revenue-sharing
arrangement with the mutual funds constituted transactions
prohibited by ERISA. In response, Nationwide requested that
the trustees’ suit be dismissed, asserting that they were
not subject to ERISA’s prohibited transaction rules
because they were not plan fiduciaries and because the
revenue-sharing payments were not plan assets.

In denying the companies’ motion, the court noted
that while the companies were not plan fiduciaries for all
purposes, a reasonable jury could find that they acted as
fiduciaries through their indirect authority or control
over the participant contributions made to the mutual
funds. Also, Underhill said that a reasonable jury could
conclude that the Nationwide companies exercised authority
or control over disposition of plan assets – making them
plan fiduciaries – by controlling which mutual funds were
available investment options.